The common justification, in financial theory, for the existence of debt covenants is their use as contractual devices that reduce agency problems between borrowers and lenders. The thesis first examines the extent to which debt covenants alleviate these agency problems, and how they affect a borrower's debt financing decisions. Then, building on recent theories on the costs of bank financing, the dissertation suggests a new economic rationale for debt covenants as instruments that can reduce these costs. The thesis consists of three essays: / The first essay shows that, debt covenants create underinvestment incentives while reducing the overinvestment cost of debt It also finds that the borrower's choice between different contracts with, and without covenants, depends on the magnitude of the agency problems, and the quality of the lender's monitoring technology. / The second essay shows how debt covenants reduce the costs of banks information monopoly. In fact, contingent contracting with debt covenants can be used by banks to precommit against using their informational advantage to hold up borrowers and extract rents, thus giving borrowers incentives to exert greater effort. / The third essay shows that the renegotiation that debt covenants permit, can reduce liquidity risk defined as the risk that a solvent but illiquid borrower is unable to obtain refinancing. It also shows that a debt contract with covenants is similar to a mix of debt contracts with different maturities. / The thesis concludes with a review of the determinants of corporate debt maturity structure, and the literature on corporate reliance on bank financing and suggests future research in this area.
| Identifer | oai:union.ndltd.org:LACETR/oai:collectionscanada.gc.ca:QMM.35632 |
| Date | January 1998 |
| Creators | Sy, Amadou Nicolas Racine. |
| Contributors | Detemple, Jerome (advisor) |
| Publisher | McGill University |
| Source Sets | Library and Archives Canada ETDs Repository / Centre d'archives des thèses électroniques de Bibliothèque et Archives Canada |
| Language | English |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
| Format | application/pdf |
| Coverage | Doctor of Philosophy (Faculty of Management.) |
| Rights | All items in eScholarship@McGill are protected by copyright with all rights reserved unless otherwise indicated. |
| Relation | alephsysno: 001610219, proquestno: NQ44604, Theses scanned by UMI/ProQuest. |
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